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Advice Firms Struggle to Get Compensation Right: Study

By Murray Coleman April 23, 2015

Advisory firms work hard at designing compensation plans that will keep their rainmakers happy, offering a wide assortment of bonuses, incentive packages and little extras. Still, few in the industry seem enthralled by their overall pay, judging by results of the 2015 Trends in Adviser Compensation and Benefits study, a joint project between FA-IQ and the Financial Planning Association’s Research and Practice Institute.

Only 26% of survey respondents claim to be “very satisfied” with their earnings. And fewer than a third of participants consider their firms’ comp plans “highly competitive,” says the report, whose researchers polled 694 participants in February and included advisors at independent RIAs, regional broker-dealers and wirehouses.

“Even when you’ve come up with a compensation plan that seems fair, you’ve always got to keep an eye on what the competition is up to,” says Michael Delgass, managing director at New York-based Sontag Advisory, which oversees about $4.2 billion. “It’s a real challenge to figure out where you stand in such a dynamic and growing industry.”

The FAs quoted in this story did not necessarily take part in the survey, which was anonymous.

Michael Delgass

Getting pay right is both a strategic and a financial challenge, because investment in their teams is almost always advice firms’ biggest operational expense. Researchers found that practices with 10 or more team members spend a median $1.2 million per year on salaries, benefits, talent development and outsourcing. Firms with three or fewer team members spend a median $144,000.

At Sontag Advisory, compensation topped $5 million last year for the RIA’s 38 advisors and support staff, according to Delgass. Most of that money was in the form of salaries, which make up about 80% of FAs’ total compensation. Perhaps just as important for keeping the team contented, he says, is the 20% given out as bonuses. “We’ve found in the past that a fair bonus plan is a good way to reward top advisors and create more incentives for them to keep growing their practices,” he says.

Still, his firm’s plan remains a work in progress. In the future, Delgass expects bonus pools to be tied to firm-wide growth rather than just individual production. “We’re trying to build more transparency into the system,” he says, “while sending a message that we all prosper when everyone does well.”

Rather than offer conventional bonuses, managers at the Center for Financial Planning complement salaries with up to 50% of advisors’ take-home pay through incentives packages tailored to the way each advisor likes to work, says Matthew Chope, a partner at the Southfield, Mich.-based RIA, which manages $900 million.

For example, one veteran FA at the firm has developed a niche serving older clients. She’s become such an expert that local gerontology groups regularly ask her to speak and take part in projects, according to Chope. “Her knowledge of the social and psychological aspects of aging is something we all tap into to help our retired clients,” he says.

As a result, the specialist FA’s incentive package is designed to reward her for working with others, both at the firm and outside it. “The bulk of each person’s incentive plan is geared to gaining new business through referrals and higher plan participation rates — not cold calling,” says Chope.

At EP Wealth Advisors in Torrance, Calif., which manages nearly $2 billion, managing director Brian Parker tries to keep compensation flexible. Some new advisors prefer to be on 100% salary, he says, while experienced FAs tend to lean in the opposite direction, some combining bonuses with incentives that are 75% production-based. “You’ve got to look at each advisor’s level of experience,” says Parker.

The RIA also invests in advisor development by gradually promoting into client-facing roles staff members who support senior advisors. That process can take years, according to Parker, during which managers must recognize how important earning a set salary is to a rookie FA. “Finding and retaining talented people is the most challenging part of growing a firm these days,” he says. “The more you can do that organically and create a compensation plan that meets each person’s own unique situation, the better chance you’ve got to control your own future.”